Don’t let team incentives kill your profit!

Don't let team incentives kill your profitRecently I saved one of my clients a massive shortfall by reconstructing their bonus scheme. I say reconstructing because, simply removing it would have been counter-productive. The way it was being set up could have increased turnover but actually decreased net profit. His record turnover could have become a record loss!

Before I get onto the potential financial traps in bonus schemes, let me share a thought on incentivisation and reward as a whole. The obvious first port of call is to offer a cash reward based on hitting an individual or team performance target. This makes a lot of sense on the face of it, and is the default position for most businesses. The reality is, however, that not everyone is motivated by extra money.

There are a whole host of other things that many employees would prefer. The easiest way to find out what motivates your team is simply to ask them; and if you do this I imagine the responses will include: extra holidays, flexible hours, working from home, company socials, free flights or holidays, experience days, vouchers or a day off on their birthday.

You will be amazed at the power of creating reward schemes that your employees actually want to achieve. My experience is that incentives for team effort generate a better response than individual ones (except perhaps for a sales team).

Measure the cost of an improved performance

As a business owner, I would be prepared to pay a very high cost to keep my team motivated, enthused and interested in doing a great job for the business. When they believe in what we are doing, enjoy working together and feel part of the business family, all I need to do is keep the ship sailing in the right direction – the engine will become self-generating. But if that cost means the business is no longer making the profit that I need to grow, it becomes inefficient – so planning a strong motivation strategy is key to the bigger picture.

Despite my clients’ close call (mentioned earlier), basing the target on turnover (or units sold) is generally a good starting point because it is unambiguous, transparent and easy to record. Bringing measurements like profit into the equation opens the door for your team to question how much the business is making for you etc. His problem was that he hadn’t considered what the additional sales would do to the profit margins and bottom line.

My advice is to run various scenarios of what various levels of success would look like in reality. For example, how would an increase of 20, 40 or 50% in turnover affect the bottom line profit. Take into account the extra cost such as an increase might require (team, stock, storage, cash-flow or delivery). It is not always the case that turnover and margin operate in parallel with each other. Through these scenarios you should be able to judge what you are prepared to give back in order to motivate a realistic effort from your team.

With that information at hand, you can spend this amount wisely to give them the very best version of their perfect incentive – whatever that may be.

Incidentally, my team love socialising, days out and fancy evening events on the company. So, if the response from your team is that they would like more of that get in touch and I’ll let you know about some of the best venues we’ve visited over the years.